BOSCOV’S DEPARTMENT STORE, INC., Plaintiff, v. AMERICAN GUARANTEE AND LIABILITY INSURANCE COMPANY, Defendant.
Civil No. 5:20-cv-03672-JMG
IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF PENNSYLVANIA
June 29, 2021
GALLAGHER, J.
GALLAGHER, J. June 29, 2021
When Plaintiff Boscov’s Department Store, Inc. closed its doors because of the COVID-19 pandemic, it turned to its insurer, Defendant American Guarantee and Liability Insurance Company (“AGLIC”), to recover business losses. Like so many others faced with the same predicament, Boscov’s was denied coverage. Boscov’s now brings a lawsuit against AGLIC for breach of contract and a declaratory judgment. It also claims that AGLIC breached the duty of good faith and fair dealing. Before the Court are AGLIC’s motions to strike and for judgment on the pleadings. For the reasons explained below, we will deny the motion to strike, but will grant the motion for judgment on the pleadings.
I. BACKGROUND
Boscov’s is a family-owned business that operates department stores in Pennsylvania, New York, New Jersey, Delaware, Maryland, Ohio, Connecticut, and Rhode Island. Compl. ¶ 13, ECF No. 1. Between June 1, 2019, and June 1, 2020, Boscov’s maintained an all-risk insurance policy (the “Policy”) with AGLIC. Id. ¶ 37. In relevant part, the Policy insured against “direct physical loss of or damage caused by a Covered Cause of Loss to Covered Property.” Id. ¶ 40; see also
Several Boscov’s locations closed on March 13, 2020, just one week after Pennsylvania Governor Tom Wolf issued a Proclamation of Disaster Emergency regarding COVID-19. Compl. ¶ 36; see Compl. Ex. A, at 4, ECF No. 1-1. Civil authorities nationwide followed suit, as “states, counties, and cities where Boscov’s insured stores are located issued orders closing or restricting access to numerous Boscov’s locations.” Compl. ¶ 32. See generally Compl. Ex. A. By March 17, 2020, Boscov’s closed the remainder of its stores. Compl. ¶ 36.
Soon after, Boscov’s notified AGLIC of its claim for losses incurred due to the pandemic and the associated shutdown orders. Id. ¶ 73. AGLIC allegedly failed to investigate the matter. Id. ¶¶ 77–79. Instead, in a letter dated June 10, 2020, AGLIC summarily rejected Boscov’s claim. Id. ¶ 74. It denied that the “necessary suspensions of Boscov’s businesses were ‘due to direct physical loss of or damage to Property’ caused by a ‘Covered Cause of Loss at the Location.’” Id.
On July 28, 2020, Boscov’s sued AGLIC, alleging breach of contract, breach of the duty of good faith and fair dealing, and requesting a declaratory judgment on issues related thereto. Id. ¶¶ 88–105. AGLIC filed its answer, and now moves for judgment on the pleadings. See Answer, ECF No. 5; Def.’s Mot., ECF No. 14; Def.’s Reply, ECF No. 21. Boscov’s opposes the motion and makes two requests for judicial notice, the latter of which AGLIC seeks to strike. See Pl.’s Opp’n, ECF No. 19; Req., ECF Nos. 20, 24; Mot. to Strike, ECF No. 26; Pl.’s Opp’n, ECF No. 29. Both parties have submitted extensive supplemental authority. See ECF Nos. 27-1, 34–35, 42, 45, 54–57.
A. Motion for Judgment on the Pleadings
“After the pleadings are closed—but early enough not to delay trial—a party may move for judgment on the pleadings.”
Motions for judgment on the pleadings are governed by “the same standards that apply to a Rule 12(b)(6) motion.” Wolfington v. Reconstructive Orthopaedic Assocs. II PC, 935 F.3d 187, 195 (3d Cir. 2019) (quoting Revell v. Port. Auth. of N.Y. & N.J., 598 F.3d 128, 134 (3d Cir. 2010)). Accordingly, we must determine whether the complaint is supported by well-pleaded factual allegations. Ashcroft v. Iqbal, 556 U.S. 662, 679 (2009). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice” and “only a complaint that states a plausible claim for relief survives” dismissal. Id. at 678–79 (citing Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556–57 (2007)).
Third Circuit courts engage in a three-step process to determine the sufficiency of a complaint. First, we “tak[e] note of the elements [the] plaintiff must plead to state a claim.” Connelly v. Lane Const. Corp., 809 F.3d 780, 787 (3d Cir. 2016) (quoting Iqbal, 556 U.S. at 675). Second, we “identify allegations that, ‘because they are no more than conclusions, are not entitled to the assumption of truth.’” Id. (quoting Iqbal, 556 U.S. at 679). Finally, we assume the veracity of well-pleaded factual allegations and then “determine whether they plausibly give rise to an entitlement to relief.” Id. (quoting Iqbal, 556 U.S. at 679).
B. Judicial Notice
On a Rule 12(c) motion, we may take judicial notice in accordance with
While the Federal Rules of Evidence “allow a court to take judicial notice at any stage of the proceedings, . . . it should be done sparingly at the pleadings stage.” Victaulic Co. v. Tieman, 499 F.3d 227, 236 (3d Cir. 2007) (internal citation omitted). But see, e.g., Oran v. Stafford, 226 F.3d 275, 289 (3d Cir. 2000) (taking judicial notice of “properly-authenticated public disclosure documents filed with the SEC” in reviewing a Rule 12(c) motion).
“The court may strike from a pleading an insufficient defense or any redundant, immaterial, impertinent, or scandalous matter.”
Rule 12(f) is directed at pleadings—not motions or briefs. See, e.g., PG Publ’g Co. v. Aichele, 902 F. Supp. 2d 724, 735 (W.D. Pa. 2012), aff’d, 705 F.3d 91 (3d Cir. 2013); see also Bunn v. Perdue, 966 F.3d 1094, 1099 (10th Cir. 2020) (“Generally, . . . motions, briefs, and memoranda may not be attacked by a motion to strike.” (quoting Ysais v. N.M. Jud. Standard Comm’n, 616 F. Supp. 2d 1176, 1184 (D.N.M. 2009))). That being said, “courts can entertain motions to strike beyond what Rule 12(f) provides.” McGinnis v. Midland Funding LLC, No. 2:20-cv-05370-JDW, 2021 WL 1061198, at *1 (E.D. Pa. Mar. 19, 2021). Because “federal judges have the inherent power to manage cases that come before them,” Williams v. Guard Bryant Fields, 535 F. App’x 205, 212 (3d Cir. 2013) (citation omitted), courts may consider “motions that a party captions a motion to strike but that are different in kind than the motions that Rule 12(f) contemplates.” McGinnis, 2021 WL 1061198, at *1; see, e.g., Lawrence v. Int’l Bus. Mach. Corp., No. 12-cv-8433(DLC), 2017 WL 3278917, at *4 (S.D.N.Y. Aug. 1, 2017) (evaluating motion to strike a request for judicial notice).
D. Interpretation of Insurance Policies
“Under Pennsylvania law, ‘the interpretation of a contract of insurance is a matter of law for the courts to decide.’” Allstate Prop. & Cas. Ins. Co. v. Squires, 667 F.3d 388, 391 (3d Cir. 2012) (quoting Paylor v. Hartford Ins. Co., 640 A.2d 1234, 1235 (Pa. 1994)). Our objective is to
“Clear contractual terms that are capable of one reasonable interpretation must be given effect without reference to matters outside the contract.” Am. Eagle Outfitters v. Lyle & Scott Ltd., 584 F.3d 575, 587 (3d Cir. 2009) (quoting Krizovensky v. Krizovensky, 624 A.2d 638, 642 (Pa. Super. Ct. 1993)). By contrast, contractual language is ambiguous if it “is reasonably susceptible of different constructions and capable of being understood in more than one sense.” Id. (quoting Allegheny Int’l, Inc. v. Allegheny Ludlum Steel Corp., 40 F.3d 1416, 1425 (3d Cir. 1994)); see also 12th St. Gym, Inc. v. Gen. Star Indem. Co., 93 F.3d 1158, 1165 (3d Cir. 1996) (“Disagreement between the parties over the proper interpretation of a contract does not necessarily mean that a contract is ambiguous.” (citing Vogel v. Berkley, 511 A.2d 878, 881 (Pa. Super. Ct. 1986))). Ambiguous language must be construed against the insurer. Squires, 667 F.3d at 391.
III. DISCUSSION
A. Policy Coverage
“[A]n insured bears the initial burden to make a prima facie showing that a claim falls within the policy’s grant of coverage, but if the insured meets that burden, the insurer then bears
Here, the Policy insures “against direct physical loss of or damage caused by a Covered Cause of Loss to Covered Property.” Compl. Ex. C, at 14. Covered Causes of Loss are “[a]ll risks of direct physical loss of or damage from any cause unless excluded.” Id. at 60. Boscov’s alleges that coverage for its business losses exists under Section III and Section IV of the Policy. Compl. ¶¶ 60–61. Section III insures against property damage, Compl. Ex. C, at 22–25, while Section IV, the time element section, states:
The Company will pay for the actual Time Element loss the Insured sustains, as provided in the Time Element Coverages, during the Period of Liability. The Time Element loss must result from the necessary Suspension of the Insured’s business activities at an Insured Location. The Suspension must be due to direct physical loss of or damage to Property . . . caused by a Covered Cause of Loss at the Location, or as provided in Off Premises Storage for Property Under Construction Coverages.
Id. at 26 (emphasis added). Boscov’s also claims coverage under the following special coverage provisions:
| Provision | Provides coverage for . . . |
|---|---|
| Accounts Receivable | “the actual loss sustained resulting from direct physical loss of or damage caused by a Covered Cause of Loss to the Insured’s account receivable records . . . .” Id. at 31 (emphasis added). |
| Civil or Military Authority | “the actual Time Element loss sustained by the Insured, as provided by this Policy, resulting from the necessary Suspension of the Insured’s business activities at an Insured Location if the Suspension is caused by order of civil or military authority that prohibits access to the Location. That order must result from a civil authority’s response to direct physical loss of or damage caused by a Covered Cause of Loss to property not owned, occupied, leased or rented by the Insured or insured under this Policy and located within the distance of the Insured’s Location as stated in the Declarations.” Id. at 32–33 (emphasis added). |
| Provision | Provides coverage for . . . |
|---|---|
| Contingent Time Element | “the actual Time Element loss . . . directly resulting from the necessary Suspension of the Insured’s business activities at an Insured Location if the Suspension results from direct physical loss of or damage caused by a Covered Cause of Loss to Property . . . at . . . Attraction Properties . . . .” Id. at 33 (emphasis added).1 |
| Protection and Preservation of Property | “[t]he reasonable and necessary costs incurred for actions to temporarily protect or preserve Covered Property; provided such actions are necessary due to actual or imminent physical loss or damage due to a Covered Cause of Loss . . . .” Id. at 41 (emphasis added). |
To state a prima facie claim for coverage under the Policy, Boscov’s must plausibly allege that it suffered “direct physical loss of or damage” to covered property. Id. at 14. The parties do not dispute that use of the disjunctive “or” evidences an intent to differentiate between “loss of” and “damage” to property. Compare Def.’s Mem. 7, ECF No. 14-1, with Pl.’s Mem. 10, ECF No. 19. The Policy, however, does not define “direct physical loss” or “direct physical damage.” This does not render the language ambiguous. See Heebner v. Nationwide Ins. Enter., 818 F. Supp. 2d 853, 857 (E.D. Pa. 2011). Instead, we read the phrases according to their plain and generally accepted meanings. See Am. Auto. Ins. Co. v. Murray, 658 F.3d 311, 320–21 (3d Cir. 2011).2
Direct physical damage is “a distinct, demonstrable, physical alteration of the property.” Newchops Rest. Comcast LLC v. Admiral Indem. Co., Nos. 20-1949, 20-1869, 2020 WL 7395153, at *5 (E.D. Pa. Dec. 17, 2020) (quoting 10A COUCH ON INS. § 148.46 (3d ed. 1995)). “Pure economic losses are intangible and do not constitute property damage.” Id. (citing 9A COUCH ON INS. § 129.7).
Third Circuit precedent supports these interpretations. In Port Authority of New York and New Jersey v. Affiliated FM Ins. Co., the court examined whether the presence of asbestos in a building triggered insurance coverage. 311 F.3d 226, 236 (3d Cir. 2002). It recognized that, “[i]n ordinary parlance and widely accepted definition, physical damage to a property means ‘a distinct, demonstrable, and physical alteration’ of its structure,” such as from fire, water, or smoke that “may demonstrably alter the components of a building.” Id. at 235 (quoting 10A COUCH ON INS. § 148:46 (3d ed. 1998)). “Physical damage to a building as an entity by sources unnoticeable to the naked eye must meet a higher threshold.” Id. Under this standard, the court concluded that the “mere presence of asbestos, or the general threat of future damage from that presence, lacks the distinct and demonstrable character necessary for first-party insurance coverage.” Id. at 236.
The Port Authority court further held that “physical loss” of a structure occurs when it has been rendered “uninhabitable and unusable.” Id. When “[t]he structure continues to function—it has not lost its utility,” and there is no physical loss. Id.; see also Motorists Mut. Ins. Co. v. Hardinger, 131 F. App’x 823, 826–27 (3d Cir. 2005) (applying Port Authority under Pennsylvania
Courts in this District have overwhelmingly applied Port Authority to COVID-19 insurance disputes, interpreting “the phrase ‘direct physical loss of or damage’ to require a direct nexus between the alleged loss and the physical conditions of the covered premise. That is, there must be some issue with the physical premises which precludes or impedes the business operations, thereby causing the losses complained-of.” Frank Van’s Auto Tag, LLC v. Selective Ins. Co. of the Se., No. 20-2740, 2021 WL 289547, at *5 (E.D. Pa. Jan. 28, 2021) (citations omitted).3
Against this backdrop, Boscov’s has not plausibly alleged “direct physical loss of or damage” to property under the Policy. Beginning with “direct physical damage,” Boscov’s admits that “[n]o Boscov’s location has been required to respond to the actual presence of virus.” Compl. ¶ 49. Instead, it alleges that “the virus has been and remains a threat to the insured properties and surrounding properties, and ongoing direct physical loss of or damage must thus be presumed.” Id. ¶ 64. Such “general threat[s] of future damage” do not constitute “physical damage.” Port Auth., 311 F.3d at 236; see, e.g., Newchops, 2020 WL 7395153, at *5 (denying insurance coverage where “[t]here was no physical damage to the insureds or others’ properties alleged in the amended complaints”).
This theory, however, is inconsistent with a permissible reading of the Policy. For the reasons explained above, “the plain meaning of the phrase ‘direct physical loss of’ requires an explicit nexus between the purported loss and the physical condition of the insured property.” Star Buick GMC v. Sentry Ins. Grp., No. 5:20-cv-03023, 2021 WL 2134289, at *5 (E.D. Pa. May 26, 2021) (citations omitted). In other words, the insured property must “be rendered unusable by some physical force.”4 Tria WS, 2021 WL 1193370, at *4.
Though Boscov’s business has undoubtedly been impacted by the pandemic, its alleged losses bear no causal connection to the physical condition of its properties. See, e.g.,
Boscov’s special coverage claims likewise fail. The Accounts Receivable provision reimburses an insured “for the actual loss sustained resulting from direct physical loss of or damage
Boscov’s also invokes the Civil or Military Authority provision, which applies when a suspension of business “is caused by order of civil or military authority that prohibits access to” insured locations. Compl. Ex. C, at 32. “That order must result from a civil authority’s response to direct physical loss of or damage caused by a Covered Cause of Loss” to property within one mile of an insured location. Id.; see id. at 17; see also Kahn v. Pa. Nat’l Mut. Cas. Ins. Co., No. 1:20-cv-781, 2021 WL 422607, at *8 (M.D. Pa. Feb. 8, 2021) (“[A] plain reading of the Civil Authority coverage provision unambiguously requires an allegation that another property, besides the insured premises, suffered some ‘physical loss’ or ‘damage.’”). Absent from the complaint, though, are any well-pleaded factual allegations that property within one mile of Boscov’s locations suffered “direct physical loss” or “direct physical damage.” See, e.g., Hair Studio, 2021 WL 1945712, at *10; Frank Van’s, 2021 WL 289547, at *7; see also Toppers Salon & Health Spa, Inc. v. Travelers Prop. Cas. Co. of Am., 503 F. Supp. 3d 251, 257 (E.D. Pa. 2020) (“[Plaintiff] did
Finally, the Contingent Time Element provision applies when a policyholder suspends its business activities, and that suspension “results from direct physical loss of or damage caused by a Covered Cause of Loss to Property . . . at . . . Attraction Properties.” Compl. Ex. C, at 33. Attraction Properties must be located within one mile of an insured location. Id. at 17. Boscov’s alleges that the “threat of virus and the . . . closure orders issued by state, county, and city officials have caused direct physical loss of or damage to properties Boscov’s depends on to attract business.” Compl. ¶ 57. This conclusory allegation fails to identify any such properties located within one mile of Boscov’s insured premises. But even if it had, the “threat of virus” and “closure orders” do not result in the “direct physical loss of or damage” to property necessary to trigger coverage.
In support of its claims, Boscov’s asks that we take judicial notice of documents produced by the Insurance Services Office (“ISO”) and certain individual insurance companies, namely, Greater New York Mutual Insurance Company, Insurance Company of Greater New York, INSCO, and Strathmore Insurance Company (collectively, “GNYM”). See Req., ECF No. 20; see also Pl.’s Mem. 5–9. The first document, filed by the ISO in 2006, reflects the organization’s efforts to exclude virus-related losses from insurance coverage. Pl.’s Mem. Ex. O, ECF No. 19-
While we will take judicial notice of these materials, they do not change our conclusion. Boscov’s argues that the documents “demonstrate widespread agreement in the insurance industry that virus and similar adverse conditions may cause ‘direct physical loss of or damage to’ insured property.”6 Pl.’s Mem. 9. “Evidence of industry custom or trade usage ‘is always relevant and admissible in construing commercial contracts,’ and does not depend on the existence of ambiguity in the contractual language.” Gen. Refractories Co. v. First State Ins. Co., 855 F.3d 152, 160 (3d Cir. 2017) (quoting Sunbeam Corp. v. Liberty Mut. Ins. Co., 781 A.2d 1189, 1193 (Pa. 2001)); see also Sapa Extrusions, 939 F.3d at 256–57. The ISO and GNYM documents, however, do not show that the phrase “direct physical loss of or damage to” has a “special meaning or usage” in the insurance industry. Id. That is, they do not suggest a “peculiar usage” of the phrase that conflicts with its unambiguous, plain meaning, or the interpretation that has emerged from precedent.7 See Sunbeam, 781 A.2d at 1193.
B. Policy Exclusion
Even if Boscov’s showed that it was entitled to insurance coverage, its claims would still be barred by the Policy’s “Contamination Exclusion.” The Contamination Exclusion applies to “Contamination, and any cost due to Contamination including the inability to use or occupy property or any cost of making property safe or suitable for use or occupancy.” Compl. Ex. C, at 23. “Contamination,” in turn, is defined as “[a]ny condition of property due to the actual presence of any foreign substance, impurity, pollutant, hazardous material, poison, toxin, pathogen or pathogenic organism, bacteria, virus, disease causing or illness causing agent, Fungus, mold or mildew.” Id. at 60 (emphasis added).
The definition of “Contamination” is unambiguous and certainly applies to COVID-19. See, e.g., Star Buick, 2021 WL 2134289, at *7 (“The virus exclusion . . . unambiguously applies to COVID-19.”); see also Hair Studio, 2021 WL 1945712, at *11 (“Numerous courts, applying Pennsylvania law, have thoroughly addressed arguments regarding the Virus Exclusion’s applicability to insurance claims based on COVID-19 shutdowns. These cases have almost unanimously concluded that the language of the Virus Exclusion unambiguously bars coverage.”). “Because all of Plaintiff’s claims for coverage are due to COVID-19, this exclusion is fatal to Plaintiff’s claims.” RDS Vending, 2021 WL 1923024, at *6.
In support of its argument, Boscov’s asks that we take judicial notice of three documents. See Req., ECF No. 24. All three documents reflect AGLIC’s recent efforts to modify its form insurance policies. Namely, AGLIC has added explicit language indicating that the “Amendatory Endorsement – Louisiana” applies only to property in Louisiana. Req. Ex. B, at 14, ECF No. 24-3. This, Boscov’s contends, is a tacit admission that the Louisiana Amendatory Endorsement in its Policy is not so limited.
Again, we will take judicial notice of these materials,9 but they do not change our conclusion. “Where the words of a contract are clear and unambiguous, its meaning must be determined by its contents alone, without reference to extrinsic aids or evidence.” Tax Matrix Techs., LLC v. Wegmans Food Mkts., Inc., 154 F. Supp. 3d 157, 173 (E.D. Pa. 2016) (citing Am. Eagle, 584 F.3d at 587). Having already found the language of the Policy clear and unambiguous,
C. Good Faith and Fair Dealing
“‘[T]o recover under a claim of bad faith,’ the insured must show that the insurer ‘did not have a reasonable basis for denying benefits under the policy and that the insurer knew of or recklessly disregarded its lack of reasonable basis in denying the claim.’” Amica Mut. Ins. Co. v. Fogel, 656 F.3d 167, 179 (3d Cir. 2011) (quoting Terletsky v. Prudential Prop. & Cas. Ins. Co., 649 A.2d 680, 688 (Pa. Super. Ct. 1994)); see also Treadways LLC v. Travelers Indem. Co., 467 F. App’x 143, 147 (3d Cir. 2012) (“Though we have held that bad faith may be found in circumstances other than an insured’s refusal to pay, ‘[a] reasonable basis is all that is required to defeat a claim of bad faith.’” (quoting J.C. Penney Life Ins. Co. v. Pilosi, 393 F.3d 356, 367 (3d Cir. 2004))).
“Pennsylvania courts have held that if the insurer properly denied a claim, the policyholder is unable to state a bad faith claim.” Kahn, 2021 WL 422607, at *5 n.5 (citing Cresswell v. Pa. Nat’l Cas. Ins. Co., 820 A.2d 172, 179 (Pa. Super. Ct. 2003)). AGLIC properly denied Boscov’s insurance claims, so it did not act in bad faith. AGLIC’s alleged “failure to investigate” the matter also does not amount to bad faith. Compl. ¶ 104. Simply put, there was “nothing to investigate: coverage d[id] not exist on the face of [Boscov’s] claim[s].” Clear Hearing Sols., LLC v. Cont’l Cas. Co., No. 20-3454, 2021 WL 131283, at *11 (E.D. Pa. Jan. 14, 2021) (rejecting bad faith claim premised on insurer’s denial of insurance coverage “without conducting any investigation”);
D. Leave to Amend
AGLIC properly denied Boscov’s insurance claims, so it did not breach10 the Policy or act in bad faith. Still, we must determine whether Boscov’s is entitled to amend its complaint. See
Boscov’s specifically “requests leave to re-plead based on recently-developed evidence of the presence of the virus at Boscov’s locations as well as positive cases of COVID-19 involving employees and customers.” Pl.’s Mem. 21. Such an amendment would be futile, so we will not grant leave to amend. See Alvin v. Suzuki, 227 F.3d 107, 121 (3d Cir. 2000) (“Leave to amend may be denied . . . if amendment would be futile.”). Any new allegations regarding the “actual presence” of COVID-19 at Boscov’s properties would fall squarely within the reach of the Policy’s Contamination Exclusion.
IV. CONCLUSION
For the foregoing reasons, Defendant’s motion to strike is denied and its motion for judgment on the pleadings is granted. An appropriate order follows.
BY THE COURT:
/s/ John M. Gallagher
JOHN M. GALLAGHER
United States District Court Judge